{"id":217846,"date":"2021-11-30T05:30:00","date_gmt":"2021-11-30T13:30:00","guid":{"rendered":"https:\/\/calmatters.org\/?p=217846"},"modified":"2021-12-14T18:38:01","modified_gmt":"2021-12-15T02:38:01","slug":"renew-californias-commitment-to-its-innovation-economy","status":"publish","type":"post","link":"https:\/\/calmatters.org\/_ko\/commentary\/2021\/11\/renew-californias-commitment-to-its-innovation-economy\/","title":{"rendered":"Renew California\u2019s commitment to its innovation economy"},"content":{"rendered":"
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By Matt Horton<\/h3>

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Matt Horton is a director at the Milken Institute\u2019s Center for Regional Economics and California Center.<\/em><\/p>

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Aaron Melaas, Special to CalMatters<\/h3>

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Aaron Melaas is associate director of the Center for Regional Economics at the Milken Institute.<\/em><\/p>

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As California contemplates how to create more and better high-paying jobs, our dominance in high-technology industries provides a unique set of tools to provide residents with economic opportunity. But the Golden State risks squandering its advantages without new approaches to developing and retaining innovative talent, particularly as high-tech industries are drawn to incentives in other locations. <\/p>\n\n\n\n

The foundation of knowledge-based economic development in California has long been bolstered by its research and development credit<\/a>. First created in 1987, it provides firms conducting qualified research activities with a 15% tax credit on overall expenses and a 24% tax credit on basic research, including wages paid to employees engaging in or supervising R&D.<\/p>\n\n\n\n

While the specific effects of the credit on investment are difficult to quantify, various studies have demonstrated the effectiveness<\/a> ~\uc758 similar research credits<\/a>, and local firms have cited its influence<\/a> on their planning.<\/p>\n\n\n\n

In 2015, the Milken Institute analyzed the effectiveness of the R&D credit in our report on \u201cCalifornia\u2019s Innovation-Based Economy<\/a>.\u201d Our report suggested benefits surrounding expanding the credit, particularly to help offset high local operating costs. As many of those costs have continued to rise<\/a>, however, state leaders have prioritized short-term concerns at the expense of sustaining the state\u2019s long-term comparative innovation advantage.<\/p>\n\n\n\n

When the state confronted a projected $54 billion deficit<\/a> during the early stages of the pandemic, leaders placed a three-year cap<\/a> on business tax incentives, including the R&D credit. Despite protecting the state\u2019s fiscal outlook by increasing general fund revenues<\/a>, this move increased cost uncertainty for businesses at a time when economic volatility was already high. <\/p>\n\n\n\n

For three decades, this incentive had helped businesses lower the risks inherent to investing in product and process improvements, but the policy change signaled a diminished commitment to innovation-led growth.<\/p>\n\n\n\n

There were already signs that California\u2019s edge in high-tech employment was starting to diminish. In industries where R&D is a cornerstone of firms\u2019 ability to compete for market share \u2013 such as information and computer science; architecture and engineering; life and physical sciences; and arts, entertainment, and media \u2013 the proportion of state residents employed in 2015 was 26% higher than it was nationwide (8.7% to 6.9%, respectively) according to the U.S. Bureau of Labor Statistics. By May 2020, California\u2019s edge had dropped to 20% over the national average (8.9% to 7.4%). And since last year, several high-profile high-tech companies have announced their departures<\/a> from the state. <\/p>\n\n\n\n

California is now at an inflection point, with a projected surplus of $31 billion<\/a> but no clear commitment to restore the R&D credit. The analysis in the Milken Institute\u2019s new report: \u201cSustaining California\u2019s Innovation Economy Through Investments in R&D<\/a>\u201d illustrates the continued value of R&D in terms of supporting high-wage jobs growth in California as well as providing the investment necessary to capture a broader range of innovation hubs<\/a>. <\/p>\n\n\n\n

By comparing the state\u2019s R&D credit with similar incentives in other states, we also seek to promote a conversation about ensuring that innovation-oriented firms choose to pursue growth opportunities in the Golden State. <\/p>\n\n\n\n

Our new report provides three main suggestions for consideration by state leaders:<\/p>\n\n\n\n